Monday, March 21, 2016

The Bonfire of the Hedge Funds?

Julia La Roche of Business Insider reports, The bonfire of the hedge funds:
The numbers have been tallied, and more hedge funds closed in the fourth quarter of last year than at any time since the depths of the financial crisis.

According to a new report from Hedge Fund Research, 305 hedge funds closed in the final three months of 2015, up from 203 the same time in 2014.

That is the highest number of closings since the first quarter of 2009, in the aftermath of the banking crash that lasted through late 2008.

An estimated 979 hedge funds liquidated in 2015, up from 864 in 2014. It is also the highest level since 2009, when 1,023 funds closed.

New hedge fund launches in 2015 also declined, falling from 269 in the third quarter to only 183 in the fourth quarter, making it the lowest quarter since 2009.

"The hedge fund industry experienced a contraction in number of funds in 2015, despite continued growth in investor capital to a record level, as investor risk aversion increased, resulting in capital redemptions from funds which had underperformed through the recent financial-market volatility," Kenneth Heinz, president of HFR, said in a statement.

He continued:
Investors have become increasingly discriminating in their capital allocations, and the environment for launching a new fund continues to be extremely competitive. As investor tolerance for negative performance deviations falls, and the demand for a competitive fee structures increases, funds which meet these increased institutional investor requirements should attract capital and drive industry performance in 2016.
Last year was a brutal year for the hedge fund industry, as hedge funds ended the year down 3.76% on average, according to data from HFR.

There were numerous highly publicized fund closings and redemptions. There were also many that converted to so-called family offices, which manage the money of the fund manager, his or her family members, and the money of some of the company's key employees.

There have been numerous reasons for poor performance, ranging from difficult trading conditions to concerns around global growth that have affected macro-fund managers. There was also the problem of crowded trades, with several of the most popular stocks with hedge funds suffering through 2015.


Mary Childs of the Financial Times also reports, Hedge fund closures return to crisis highs:
More hedge funds closed their doors in 2015 than at any time since the financial crisis, according to new research, as turbulent markets dragged down the industry's performance.

Last year was the worst year for liquidations since 2009, with 979 funds closing, up from 864 in 2014, according to data from Hedge Fund Research. The fourth quarter of 2015 also saw the fewest new hedge funds starting up since 2009, with just 183 openings compared with 269 in the third quarter.

The figures capture a period in which many of the industry's marquee names suffered significant losses. The HFRI Fund Weighted Composite index fell 0.9 per cent last year, HFR data show. December saw a flurry of funds converting into family offices, including Michael Platt's BlueCrest and Doug Hisch's Seneca Capital, or shutting entirely as Lucidus Capital Partners did following redemptions.

Unnerved by jerky markets, hedge fund clients became fearful of risk and less patient with poor returns in the second half of the year, according to Kenneth Heinz, HFR's president, who said many started asking for their money back from lagging funds.

"Investors have become increasingly discriminating in their capital allocations, and the environment for launching a new fund continues to be extremely competitive," he said.

The top 20 per cent of funds by assets received about 80 per cent of all new money last year, the prime brokerage group at Barclays found in an analysis of HFR data.

So far, this year does not appear to be any kinder for the industry.

Between market losses and redemptions, assets in hedge funds fell by $64.7bn in January, bringing total money in the industry below $3tn for the first time since crossing that threshold in May 2014, according to data provider eVestment. Redemptions in January were the worst since January 2009.

In February — normally a big month for inflows — about $3bn of new money trickled in, compared with $18.6bn last year, eVestment data show. Investment losses dragged down total assets by almost another $20bn to $2.95tn.

The strategy that has been winning the year so far is dictated by computers: systematic hedge funds that surf trends using financial models and algorithms have dominated the lists of the best-performing funds.

Trend-following and quantitative specialists, often known as commodity trading advisers due to their legal set-up, tend to profit when markets have a clear direction. They have lost money in four of the past five years.

Less competition can help the survivors: JPMorgan's prime brokerage found in a recent survey that more than half of respondents said "crowding" was the biggest reason behind last year's underperformance, driven by a record number of hedge funds chasing too few opportunities.

Instead of adding money to hedge funds, many asset allocators plan to recycle capital, moving from one manager to another, with strategies focused on volatility proving the most popular, JPMorgan said.
So what else is new? Last year was another brutal year for hedge funds and this year isn't shaping out to be any better, especially for Bill Ackman, the hedge fund "guru" married to his Valeant trade. We'll see if his reputation can recover from this mess and if he can turn that sinking ship around now that he got a seat on the board.

But it's not fair to just pick on Bill Ackman because in these markets there are plenty of underperforming hedge fund "all-stars". When you read that Ken Griffin's Citadel, Izzy Englander's Millennium Management and Blackstone's Senfina are all down this year, you know it's brutal out there:
Ken Griffin’s Citadel posted declines of 8 percent in its main hedge funds this year through March 11, as the $25 billion firm lost money in a unit that has helped drive profits in recent years, according to people familiar with the firm’s performance.

The Surveyor arm, which trades equities across 29 teams, accounted for about three-quarters of Citadel’s losses during the first two months of the year, said one of the people.

Citadel’s early 2016 woes echo those at some other prominent multimanager funds, which typically farm out cash to dozens of individual teams, stay market neutral and are quick to cut losses. Senfina, the multimanager fund run by Blackstone Group LP, slid 17 percent last month, erasing much of its 2015 gain, Hedge Fund Alert reported last week. Izzy Englander’s $34 billion Millennium Management fell 2.7 percent in February, its third-worst month ever, according to people briefed on the matter.

Years of growth and top returns have built these firms into some of the biggest in the industry. Since the financial crisis, Citadel’s assets have more than doubled as the firm posted gains of more than 10 percent each year. Millennium pulled in $3.8 billion in 2015, or almost one-tenth of the net inflows coming into all hedge funds.
‘Challenging Liquidity’

Investors say multimanager firms, some of which held similar positions, were hit hard at the start of the year because their tight risk controls forced them to sell at the same time, further driving down prices.

“Some managers were liquidating sizable portfolios in a short period of time into a market with challenging liquidity characteristics,” said Adam Blitz, chief investment officer at Evanston Capital Management. The sales were significant, he said, given the amount of leverage many of the firm firms use to amplify returns.

Surveyor head Jon Venetos left Citadel in January after 10 years. His replacement, Todd Barker, who has been at the firm for 12 years, cut about 15 investment professionals from the unit the following month. Surveyor, formed in 2009, has about 200 employees.

Katie Spring, a spokeswoman for the firm, declined to comment on performance.
This follows news that bond hedge funds are likely to suffer their worst quarterly loss in history. Again, one of the oft cited reasons is "lack of liquidity."

Hedge fund managers can blame crowded trades, lack of liquidity, central banks, radical transparency, the weather, or whatever else tickles their fancy. Quite frankly, I don't have any time to waste on their pathetic excuses for underperforming these markets.

Importantly, when you're getting paid 2 & 20 to manage multibillions, you better be good at managing downside risk or suffer the wrath that comes along with severe underformance. 

These markets are brutal, I know, I trade them and see how extreme volatility can unnerve even the best hedge fund manager. But when you're getting paid billions to manage billions, you are expected to deliver the best risk-adjusted returns, not blame the market for your pathetic performance.

Interestingly, all this hedge fund pain could mean stock market gains:
Investors are getting caught paddling upstream, and as they turn their bearish boats around, the tide will continue to rise for stocks, argues Tom Lee of Fundstrat Global Advisors.

"Investors are offsides right now," Lee said Friday on CNBC's "Trading Nation ." "They're bearishly positioned at a time when the weaker dollar, rallying high yield [bonds] and the oil recovery are actually quite bullish."

Lee, a noted prognosticator who previously was JPMorgan's chief equity strategist, pointed out in a Friday note that "short interest has risen 12 of the last 13 months and is currently the highest level since 2009," with short interest as a percentage of tradeable (or "floating") shares currently at 4.4 percent.

"A trillion dollars' worth of equities is sold short," Lee said Friday. "Never in history has a trillion worth of short interest been covered in 30 days. It usually takes nine to 12 months."

In fact, Lee dove into market history to find that in 8 of the past 9 times when short interest rises while credit conditions ease, the S&P 500 (INDEX: .SPX) has climbed over the next six months, with a median rise of 12 percent.

"This implies as much as 2,250-2,300," the perennially bullish Lee noted.

Whether stocks actually end up rising that substantially, Lee's bottom line is that "there's a huge amount of upside from here because we're talking a trillion sold short."

Neil Azous, an investment strategist at Rareview Macro, took a similar perspective in his Monday morning note to clients.

"It is one thing to underperform when the market is positive, but it is another thing to underperform when the market is negative," Azous wrote. "The fact is with quarter-end very near, the S&P 500 is slightly up YTD, but long/short hedge funds are down 3-7 percent. That makes them understandably nervous."

The windup of this nervousness is that "if model-driven strategies take hold of the market on the upside, and the bearish observations ... do not materialize, the pain in the hedge fund world will be that much more acute. And, that portends to even higher prices as they are forced to capitulate and join in."

In other words, the "pain point" for many large investors is located to the upside — which might be an argument that the market bounce has legs as this pain causes capitulation.
On that note, all you hedge fund gurus who are struggling in these markets should take the time to read my last comment on markets defying central banks. I have to get back to trading some small biotech shares (XBI) I'm currently focusing on (click on image):


In my opinion, a lot of these biotech momentum stocks that got slaughtered early this year are going to come back strong in the weeks and months ahead but it will be very volatile. And I'd be taking profits on Energy (XLE) and Metal and Mining Stocks (XME), especially steel stocks that have surged in the first quarter (click on image):


Once again, I thank those of you who contribute to this blog and kindly remind others to donate and/ or subscribe on the right hand side under my picture. If you can afford to pay hedge fund hot shots  2 & 20 for underperforming these markets, you can afford to pay my subscription fees.

Below, are the boom times over for hedge funds? According to the latest research, more hedge funds closed than opened in 2015. For a look at what the decline says about the market and investor sentiment, BNN interviews Ken Heinz, president, Hedge Fund Research Inc. Listen to his comments on factors driving the bifurcation of the industry.

And hedge funds are shutting down at the fastest pace since the financial crisis with 979 hedge funds closing in 2015. CNBC's Mike Santoli and the Closing Bell panel track this action.

Lastly, are getting caught paddling upstream, and as they turn their bearish boats around, the tide will continue to rise for stocks, argues Tom Lee of Fundstrat Global Advisors.

A lot of pension funds are rightly questioning why they're investing in big hedge funds charging them insane fees for underperforming these markets. My best advice remains to keep grilling these "gurus" and if you're not comfortable with their answers, just pull the plug and don't look back.



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